STATE OF NE

PUBLIC UTILITIES COMMISSION

THOMAS L .. WELCH CHAIRMAN

KAREN GERAGHTY AD~~INISTRATIVE DIRECTOR

VENDEAN V. VAFIADES DAVID P. LITTELL COMMISSIONERS

May 17, 2011

Honorable Michael Thibodeau, Senate Chair Honorable Stacey Fitts, House Chair Energy, Utilities and Technology Committee 115 State House Station

Augusta, Maine 04333

Re: LD 1570, An Act To Reduce Energy Prices for Maine Consumers

Dear Senator Thibodeau and Representative Fitts:

The Public Utilities Commission (Commission) testifies neither for nor against LD 1570, An Act To Reduce Energy Prices for Maine Consumers. The bill would cap the new renewable resource portfolio requirement at four percent, require the Commission to set the price of the alternative compliance payment rate for meeting the new renewable resource requirement at no more than 110 percent of the prior year's average market prices of renewable energy credits (RECs), and provide that the Commission may not approve a longterm contract that is greater than 90 percent of the average market price at the time of delivery to the market for capacity resources, energy or RECs.

Renewable Portfolio Requirements

General Description of Portfolio Requirements

A resource portfolio requirement, also typically referred to as a renewable portfolio standard or an RPS, is a market mechanism used to encourage the development and operation of specific types of generating facilities (usually renewable resources). Generally, the purpose of a renewable resource portfolio requirement is to promote regional resource diversity in a manner that is consistent with a competitive regional generation market. It does so by creating a premium over market prices for resources that might not otherwise be developed or operated.

The mechanism works by legislatively creating a demand for specified resources by mandating that pre-specified percentages of a retail provider's load are served by designated resources. The market then operates to meet this legislatively created demand at the lowest cost. The result of the portfolio requirement mechanism is that a premium over wholesale electricity market prices is created for the designated renewable resources. This premium is paid for by electricity customers through the supply portion of their bills.

LOCATION: IOI Second Street, Hallowell. ME 04347

MAIL; 18 State House Station, Augusr», ME 04333 -00 1 is

PHONE: (207) 287-3S3J (VOICE)

TTY: l-iS00-437-1220

fAX: (207) 287-1039

LD 1570 Testimony

May 17, 2011

Maine's Portfolio Requirements

Maine currently has two portfolio requirements: 1) a new renewable capacity resources requirement (referred to as Class I); and 2) an eligible resource requirement (referred to as Class II). Maine's original restructuring legislation included a 30% eligible resource portfolio requirement that became effective in 2000 (35-A M.R.S.A. § 3210(3». In 2007, the Legislature enacted a "new" renewable resource portfolio requirement that defines eligibility as a renewable resource that began service, resumed operation or was substantially refurbished after September 2005, (35-A M.R.S.A. § 3210(3-A)). The percentage requirement started at one percent in 2008 and increases in annual one percent increments until it reaches ten percent in 2017 and remains at ten percent thereafter.

For the most part, suppliers demonstrate compliance with Maine's portfolio requirement by obtaining RECs that are created and tracked by the New England Generation Information System (GIS). This system allows for the trading of the renewable attribute separate from the energy commodity. Eligible generators receive RECs from the GIS and may sell the RECs to retail electricity suppliers at market driven prices. Suppliers then use the purchased RECs to satisfy the portfolio requirements in Maine and the other New England states.

Alternative Compliance Mechanism

The new renewable resource portfolio requirement contains an "alternative compliance mechanism" (ACM) that allows electricity suppliers to pay specified amounts into a fund' in lieu of purchasing RECs for compliance. The purpose of an ACM is to cap ratepayer exposure to the costs of a portfolio requirement by providing an alternative to the purchase of RECs if market prices rise beyond certain levels. The portfolio requirement statute directed the Commission to establish the alternative compliance through its implementing rules. The Commission established a base alternative compliance rate of $57.12 per MWh that is adjusted annually based on the Consumer Price Index. The alternative compliance rate for 2011 is $62.13 per MWh.

LD 1570

LD 1570 would amend the new renewable resource portfolio requirement in two significant ways. First, LD 1570 would eliminate the one percent a year increase in the percentage requirement (that increases to ten percent in 2017 under current law) and cap the requirement at the current four percent obligation. Second, LD 1570 would require the alternative compliance rate to be 110% of the previous year's market prices for RECs, rather than a fixed amount that escalates each year with a measure of inflation as prescribed in the Commission's current rules.

Percentage Requirement Percentage

As mentioned, the purpose of a portfolio requirement is to promote resource diversity in Maine and New England. Resource diversity has a value in minimizing electricity price volatility and potentially lowering prices. For example, New England's electricity prices are tied, to a

1 Pursuant to statute, alternative compliance payments are deposited into the Renewable Resource Fund that was established to fund research, development and demonstration projects related to renewable energy technologies. 35-A M.R.S.A. § 10121.

Submitted by the Maine Public Utilities Commission Page 2

LD 1570 Testimony

May 17, 2011

large extent, to the market price of natural gas. Natural gas prices are currently relatively low, but they could spike or increase significantly on a longer-term basis. The promotion of resource diversity seeks to avoid an "all eggs in one basket" scenario by moderating the impact of over-reliance on limited sources of electricity.

The value of promoting resource diversity does come at a cost. As discussed, a portfolio requirement creates a premium over market costs for designated resources that is paid for by the State's electricity ratepayers. Thus, the design of a portfolio requirement requires the balancing of the value of resource diversity against the cost to ratepayers. As such, the question of the design of Maine's portfolio requirement is a fundamental issue of State energy policy to be determined by the Legislature.

Based on the actual cost information that is available, Maine's new renewable resource requirement has had a relatively modest impact on consumer rates. The cost to ratepayers during 2009 was approximately $5 million, which translates to a rate impact of 0.06 cents/kWh (or an increase of about 35 cents on a typical residential bill). During 2008, the cost was approximately $2 million with a rate impact of 0.02 cents/kWh (or an increase of about 10 cents on a typical residential bill).

However, the cost of Maine's new renewable resource portfolio requirement in the future is very difficult to predict with any degree of certainty. This is because the cost to ratepayers depends on the market cost of RECs which, in turn, depends on future market dynamics-such as the cost of renewable resource development and the market price of electricity. The market cost of RECs in Maine also depends to a significant degree on renewable resource policies in the other New England states. The potential future cost of Maine's portfolio requirement can be considered through the review of future scenarios with differing assumptions for REC market prices.

Alternative Compliance Mechanism

As discussed, the purpose of an ACM is to cap ratepayer exposure to the potential costs of a portfolio requirement. LD 1570 would set the alternative compliance rate at 110% of the previous year's average market prices for RECs. This approach of tying the alternative payment amount to market rates would appear contrary to the purpose of the ACM. This is because market prices could theoretically rise to any level, thus exposing ratepayers to unlimited costs. Therefore, if the Committee believes that the current alternative compliance rate is too high, it may want to consider setting a lower fixed rate (perhaps with an inflation escalator), rather than tying the rate to market costs.

In addition, REC market prices are not transparent and there is no published index of REC market prices. Thus, it could be difficult to set a current year alternative compliance rate base on the prior year's market prices. The Commission does require suppliers to provide information on their cost of RECs in their annual reports, and an average market rate can be determined from this data. However, there is a lag in the provision of this data so that the Commission would not be able to compile this information in time to set the compliance rate based on the prior year's market rate. For this reason, if the Committee wishes to set the rate based on prior market prices, the Commission suggests that the language be amended to use the most recent information available to the Commission.

Submitted by the Maine Public Utilities Commission

Page 3

LD 1570 Testimony

May 17,2011

Long Term Contracting

General Contracting Authority

During its 2006 session, the Legislature enacted an Act to Enhance Maine's Energy Independence and Security, P.L 2005, ch. 677 (codified at 35-A M.R.S.A. § 3210-C) that authorized the Commission to direct T&D utilities to enter into long-term contracts for power supply. Generally, the purpose of this legislation was to provide the Commission with a tool that could be used to moderate increases in the market cost of capacity and energy, and to reduce price volatility, while promoting the development of new generating resources (e.g., renewable resources) in Maine. Long-term contracts for power supply are often necessary for generating projects to be financed and developed, and a long-term contract with a creditworthy entity, such as a public utility, can be especially valuable to a developer of electric generation resources. Thus, project developers may be willing to offer attractive prices (such as fixed prices projected to be significantly lower than market prices or prices at a stated discount off market prices) in return for a long-term contract with a public utility.

However, there is an inherent risk in most long-term contracting in that the evaluation of contract prices generally involves projections of the future cost of capacity, energy and RECs. If future market prices turn out to be lower than projected and lower than the contract prices, the result could be the creation of "stranded costs" that would be paid for by electric ratepayers. Consequently, the Commission has taken a particularly cautious approach to its contracting authority. Subsequent to the enactment of its long-term contracting authority in 2006, the Commission has been presented with and has evaluated dozens of proposals, but has only accepted two proposals. These are: 1) Verso Bucksport Renewable Capacity Project and 2) Rollins Wind Project (see Commission's testimony on LD 729, An Act To Prohibit Electric Utilities From Entering Into Long-term Supply Contracts and attachments for more information on these contracts as well as a description of Maine's experience with long-term contracting prior to industry restructuring). The Commission's understanding is that these projects could not be developed without the long-term power supply contract.

The Commission also notes that it recently declined to accept proposals for long-term contracts for capacity, energy and RECs associated with two renewable generation projects. The Commission did so because it could not find that the contracts, with the pricing proposed in the term sheets, were sufficiently likely to produce ratepayer benefits without undue speculation which the Commission has said it will not do (see attached Order Rejecting Long-Term Contract Proposals, which contains a discussion of the Commission's cautious approach to long-term contracting).

LD 1570

Long- Term Contacting

Section 5 of LD 1570 provides that the Commission may not approve a longterm contract that is greater than 90 percent of the average market price at the time of delivery to the market for capacity resources, energy or RECs. Under this approach, there could never be any ratepayer costs, because the products would always be purchased at below prevailing market prices. However, the value of a contract to generation developers is generally the production of a known revenue stream over the contract term. This known revenue stream is

Submitted by the Maine Public Utilities Commission

Page 4

LD 1570 Testimony

May 17,2011

often critical for a project to obtain financing. In addition, there is no reason to expect a project developer to contract to sell its product at a discount below prevailing market prices when it could sell those products into the market itself and receive full market prices.

Thus, in the Commission's view, the likely effect of LD 1570 is that it would seriously constrain long-term contracting under the Commission authorizing legislation. Any decision to substantially alter the State's long-term contracting authority is an energy policy matter for legislative determination based on its assessment of the benefits and risks to Maine's ratepayers.

Offshore Energy Projects

As the Committee is aware, the Commission, pursuant to legislative direction, PL 2009, ch. 615, sec. A-6, is in the process of soliciting and evaluating proposals for longterm contracts associated with offshore wind and tidal projects. This authorizing legislation specifies that the Commission act in accordance with 35-A M.R.S.A. § 3210-C to conduct a competitive solicitation for offshore energy proposals, In the event LD 1570 is enacted, the Commission asks for guidance as to whether the amended language to 35-A M,RS.A. § 3210-C is intended to apply to the ongoing offshore energy solicitation.

The Commission notes that Maine's offshore wind solicitation has attracted both national and international attention. The Commission has received serious proposals from developers that have clearly devoted substantial resources in providing project proposals. As discussed above, the amended language in LD 1570 would limit the benefit of a long-term contract from the developer's perspective, and would represent a major change in terms of the Commission's solicitation shortly after proposals have been submitted. Such a change at this point could jeopardize the offshore energy project solicitation process.

The Commission looks forward to working with the Committee on LD 1570 and I would be happy to respond to any questions the Committee has at this time. The Commission will also be available at the work session to assist the Committee in its consideration of this bill.

Sincerely, / .~

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Paulina McCarter Collins, Esq. Legislative Liaison

Attachment

cc: Members, Joint Standing Committee on Energy, Utilities and Technology Jean Guzzetti, Legislative Analyst, Jon Clark, Esq., OPLA Deputy Director

Submitted by the Maine Public Utilities Commission

Page 5

REDACTED

STATE OF MAINE

PUBLIC UTILITIES COMMISSION

Docket No. 2010~66

MAINE PUBLIC UTILITIES COMMISSON Resource Planning and

Long- Term Contracting

May 10, 2011 ORDER REJECTING LONG-TERM

CONTRACT PROPOSALS

WELCH, Chairman; VAF!ADES and LITTELL, Commissioners

I. SUMMARY

Through this Order, we decline to accept proposals for long-term contracts for capacity, energy and renewable energy credits (RECs) associated with two renewable generation projects.

If. BACKGROUND

A. Long-Term Contracting Authority

Title 35-A, section 321 O-C specifies that the Commission may direct investor-owned transmission and distribution (T&D) utilities to enter into long termcontracts for capacity resources and any available energy associated with the capacity resource to the extent that the purchase of the energy fulfills the State's renewable energy expansion policies, or will lower the cost of electricity for ratepayers. 35-A M.R.S.A. § 3210-C(3). Additionally, pursuant to recently enacted legislation, P.L. 2010, Ch. 518, section 3210-C also authorizes the Commission to direct investor-owned T&D utilities to enter into long-term contracts for RECs associated with capacity resources to the extent that the price of the RECs is below market value or the purchase of the RECs adds value to the transaction. The statute specifies that the Commission select proposals that are in the best interest of customers, and that are competitive and the lowest cost relative to similar bids. 35-A M.R.S.A. § 3210-C(4)(A). Among such proposals, the statute provides a priority order that establishes new renewable resources in the State as a high priority in the selection of proposals. 35-A M.R.S.A.

§ 321 O-C(4)(B).

B. Implementing Rules

The Commission's rules for implementing the long-term contracting authority are contained in Chapter 316. Chapter 316 provides that capacity resources contracted for under the Chapter may not exceed the amount necessary to ensure the reliability of Maine's grid or to lower customer costs. Ch. 316, § 4(A). In relevant part, the rule states that the Commission may authorize a contract for capacity and energy if

Order ...

Docket No. 201 O~66

the contract prices are significantly below expected market value over the term of the contract. Ch. 316, § 4.

Although the currently effective Chapter 316 does not add ress the Commission's authority to contract for RECs (because it was adopted prior to a statutory amendment authorizing RECs to be part of long-term contracts), the Commission has issued an Order provisionally adopting amendments to Chapter 316 that include authorization to direct T&D utilities to enter into contracts for RECs. Order Provisionally Adopting Rule and Statement of Factual Policy Basis, Docket No. 2010- 260 (November 10, 2010).1 The provisionalfy adopted rule authorizes the Commission to direct contracts for "any available renewable energy credits associated with capacity resources" to the extent that 'the cost of the renewable energy credits is below market value or the purchase of the renewable energy credits adds ratepayer value to the transaction." The language contained in the provisionally adopted rule regarding ratepayer value expresses the Commission's general practice of evaluating long-term contract proposals. As stated in the provisionally adopted rule (section 5(D)), the Commission evaluates long-term contracts in terms of their potential to provide benefits to ratepayers, including contracts that provide capacity, energy or RECs at costs that are reasonably likely to be below their market value or contracts that are reasonably likely to reduce price volatillty without increasing costs to ratepayers.

C. Requests for Proposals

Section 5(8) of Chapter 316 requires the Commission to solicit bids for capacity resources through the issuance of a request for proposals (RFP) that contains all standards, procedures and requirements for the long-term contract solicitation process, as well as a standard form contract. On February 22,2010, the Commission issued an order approving and issuing the 2010 long-term contract RFP for Capacity and Associated Energy. Order Approving Request for Proposals, Docket No. 2010-66 (Feb. 22, 2010) (2010 Long-Term Contract RFP). The 2010 Long-Term Contract RFP did not include a request for long-term contract proposals that include RECs because the RFP was issued prior to the enactment of the authorizing legislation. However, the Commission has considered such proposals pursuant to the authority conferred in the feglsfation. The 2010 long-Term Contract RFP specified that long-term contract proposals be submitted by April 16, 2010.

D. Long-Term Contract Proposals

1 The Legislature has authorized the fina! adoption of the rule. Resolves 2009, ch.10.

Order,. ,

--~--.------------------------------

Docket No. 20 1 O~66

E. Comments on the Proposals

On April 20, 2011, Central Maine Power Company (CMP) filed comments on the contract proposals as presented in the term sheets, CMP analyzed the proposed transactions from the perspective of their potential impacts on customers and concluded that, although resulting impacts are highly dependent on a variety of input assumptions, the proposed pricing would result in a substantial net present value loss even under a best case scenario.

On April 22, 2011, Bangor Hydro Electric Company (SHE) and Maine Public Service Company (MPS) filed joint comments on the term sheets. Similar to CMP, BHE and MPS commented that the impact of the proposals on customers varies greatly with even small changes in assumptions of future market prices,

III, DISCUSSION

A. Overview

As stated above, section 321 O-C of Title 35-A, provides the Commission with the authority to direct T&D utilities to enter into long-term contracts for capacity, energy and RECs under certain circumstances. The underlying purpose of this authority, in the Commission's view, is to take advantage of opportunities to use longterm contracts with utilities as a means to lower capacity and energy costs or otherwise benefit Maine ratepayers. In our Order that provisionally adopted our initial implementing rules, we stated:

We do not view the enactment of the [long-term contracting authority] during the last legislative session as a fundamental shift away from industry restructuring. Accordingly, we take a cautious approach in interpreting the language and intent of the Act and in implementing its provisions so as not to unnecessarily disrupt the operation of the competitive market and to minimize the risk of creating new stranded costs.

Order ...

- 4-

************

Consistent with our cautious implementing approach, we do not propose to use our authority in the Act to speculate on the capacity or energy markets. Accordingly, we will not attempt to "time" or predict the markets in that we will not know with sufficient certainty (at least in most cases) whether any particular contract priced at the then prevailing market wf!J turn out to be "low cost" and such a course of action contains the inherent risk of creating new stranded costs if our decisions turn out to be wrong In hindsight.

Thus, we will attempt to use our long-term contracting authority primarily to leverage purchases at significant discounts off of expected market prices. A lonq-term contract with a creditworthy counterparty such as a utHity can be very valuable to a developer or owner of generation resources and such a developer or owner should be willing to offer capacity and associated energy at a Significant discount off of the prevailing market prices in return for a secure long-term contract.

Order Provisionally Adopting Rule and Statement of Factual and Policy Basis, Docket No. 2006-557 at 3 (Jan. 2, 2007).

We take an even more cautious approach with respect to long-term contracting for RECs. Unlike the market for energy, RECs are completely dependent upon the laws adopted by the Maine and other New England legislatures for their value. Thus, any fixed price contract extending out over years creates a risk to ratepayers that the cost of those RECs will not in fact be, or be reasonably likely to be, "below market value" or to "add value to the transaction," as required by statute. 35-A M.R.S.A. § 3210-C (3)(C)).

In summary, proposed pricing that offers just a possibility of being below projected market prices does not meet our view of the statutory requirement for longterm contracts. Instead, the contract pricing would have to permit the Commission to conclude that, over a wide range of possible futures, customers will be better off or, as articulated in Chapter 316, be "reasonably likely" to achieve that goal. Although there may be situations in which a fixed price proposal could meet these requirements, contracts that provide a discount off actual market prices, perhaps with a floor and a ceiling, would be more likely to create a sufficiently high probability of lower ratepayer costs to justify a contract under the statute and our rules,

Order ...

Docket No. 2010-66

B. Term Sheets

We recognize that the proposals represented by the term sheets before us would clearly advance at least some of the broad policies articulated by the Legislature, including increasing the share of new renewable resources in the State, 35-A M.R.S.A. § 321 O-C (2)(A), and reducing price volatility and greenhouse gas emissions 35-A M.R.S.A. § 321 o-c (2)(8). However, we cannot find that long-term contracts with pricing as proposed in the term sheets are sufficiently likely to produce ratepayer benefits.

The term sheets contain fixed prices for both energy and RECs. We have analyzed the proposed prices under a variety of assumptions of future market prices. Under our base case assumptions, the proposed pricing provides only marginal ratepayer benefits. Moreover, under reasonably possible future market conditions for both energy and RECs, the contract could result in substantial ratepayer benefits or costs dependent on future market conditions. We, therefore, cannot find that these contracts would be reasonably likely to provide ratepayer benefits without undue speculation which this Commission has said it will not do In adopting the long term contracting rules contained in Chapter 316. Accordingly, we conclude that the proposed pricing does not meet the requirements of the statute and our rule, and the term sheets filed on April 16, 2010 are therefore not accepted. We do, however, welcome the submission of revised pricing that would be consistent with the acceptable parameters for lonq-term contracts as discussed in this Order.

Dated at Augusta, Maine, this io" day of May, 2011.

BY ORDER OF THE COMMISSION

COMMISSIONERS VOTING FOR:

Welch Vafiades UtteU

Order ...

- 6 ~

Docket No. 2010-66

NOTICE OF RIGHTS TO REV1EW OR APPEAL

5 M.R.S.A § 9061 requires the Public Utilities Commission to give each party to an adjudicatory proceeding written notice of the party's rights to review or appeal of its decision made at the conclusion of the adjudicatory proceeding. The methods of review or appeal of PUC decisions at the conclusion of an adjudicatory proceeding are as follows:

1. Reconsideration of the Commission's Order may be requested under Section 1004 of the Commission's Rules of Practice and Procedure (65-407 C.M.R.11 0) within 20 days of the date of the Order by filing a petition with the Commission stating the grounds upon which reconsideration is sought.

2. Appeal of a final decision of the Commission may be taken to the Law

Court by filing, within 21 days of the date of the Order, a Notice of Appeal with the Administrative Director of the Commission, pursuant to 35-A M.R.S.A. § 1320(1 )-(4) and the Maine Rules of Appellate Procedure.

3. Additional court review of constitutional issues or issues involving the

justness or reasonableness of rates may be had by the filing of an appeal with the Law Court, pursuant to 35-A M,R.S.A § 1320(5).

Note: The attachment of this Notice to a document does not indicate the Commission's view that the particular document may be subject to review or appeal, Similarly, the failure of the Commission to attach a copy of this Notice to a document does not indicate the Commission's view that the document is not subject to review or appeal.

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